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The Housing Boom Doesn’t have much Life Left

21 June 2012

Even those who never thought the Canadian housing market was ever in a bubble have forecasted some kind of correction to happen within it in the next year or two. And now, we know that correction is coming.

According to a Reuters poll conducted last week, Canadian home prices are set to rise by about 2 per cent in 2012; but it will stagnate at a rate of about 0.5 per cent next year. These figures mean that since the height of the global financial crisis in 2009, Canadian home prices have risen by about one-third. Of the 15 respondents that included big banks, independent analysts, and international participants in the Reuters survey, all of them agreed that the downturn in the market would be due to housing prices that were simply too expensive for the average Canadian.

Mark Hopkins of Moody’s Analytics was one of the experts polled, and his comments were no surprise. “Home prices are overvalued by slightly under 10 per cent nationwide and most of the overvaluation is concentrated in Toronto and Vancouver.”

But even though the price of a Toronto mortgage rose almost 10 per cent in 2011, they’re expected to climb only 6.6 per cent in 2012. And next year, it’s thought that they’ll drop by 0.2 per cent.

Looking at Canada’s other most expensive housing market, Vancouver, housing prices are set to drop there as well. This year home prices fell by 1.6 per cent. And they’re set to fall by 2.5 per cent in 2013.

But will this drop in prices cause the bubble to burst, as so many had predicted? Bricklin Dwyer, economist at BNP Paribas, says it all depends.

“Whether or not Canada will face hard landing will be determined by whether or not household risk was correctly priced in the first place,” Mr. Dwyer said. “In other words, when Canadians show up [for home refinancing], if their interest rates jump and/or the terms of their loans change dramatically, then households could default at a rapid rate. If the demand for housing slows too quickly,then homeowners could quickly find themselves underwater and promoting a dangerous cycle as they try to unload their home.”

The results from the poll reflected those of the Bank of Canada’s Financial System Review that was taken recently. Within that report the Bank of Canada said, “The continued high level of activity and stretched valuations in some segments of the housing market are of increasing concern.”

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